When I heard last week that the White House would be announcing the number of “jobs created or saved” as a result of the 2009 American Reinvestment and Recovery Act, my first reaction was embarrassment.

Imagine how Christina Romer must feel. The chairman of the President’s Council of Economic Advisors was dressed in a cheery, salmon-colored jacket, a complement to the upbeat news she had to deliver on July 14. The $787 billion stimulus enacted in February 2009, which subsequently grew to $862 billion, increased gross domestic product by 2.7 percent to 3.4 percent relative to where it would have been, and added anywhere from 2.5 million to 3.6 million jobs compared with an ex-stimulus baseline.

“By this estimate, the Recovery Act has met the president’s goal of saving or creating 3.5 million jobs -- two quarters earlier than anticipated,” Romer said with a straight face. (More than 2.5 million non-farm jobs have been lost since ARRA was enacted in February 2009, all of them in the private sector, according to the Bureau of Labor Statistics.)

How does the CEA arrive at these numbers? It uses two methods, Romer said. The first is a standard macroeconomic forecasting model that estimates the multiplier effect of fiscal policy. (The government’s spending is someone else’s income.) The second method is statistical, using previous relationships between GDP and employment to project future behavior.

Model Imperfection

These numbers might just as well have been pulled out of a hat. Recall that it was the same model and method the administration used in January 2009 to predict an unemployment rate of 7 percent in the fourth quarter of 2010 with the enactment of the fiscal stimulus and 8.8 percent without. The unemployment rate now stands at 9.5 percent.

This same model convinced policy makers that the subprime crisis was contained, encouraged the rating companies to slap AAA ratings on collateralized garbage, and led banks to believe they had adequately managed their risks and reserved for potential losses.

Econometric models rely on the assumption that $1 of government spending generates more than $1 of GDP, the so-called multiplier effect. There is no allowance for the negative multiplier on the other side.

Sure the government can spend money and generate GDP growth in the short run: Government spending is a component of GDP!

What it giveth it taketh away from the private sector via taxation or borrowing. Every dollar the government spends is a dollar the private sector doesn’t spend, an investment it doesn’t make, a job it doesn’t create. This is what is unseen, as Frederic Bastiat explained in an 1850essay.Hiring Disincentives

“If the administration wants to take credit for ‘jobs created or saved,’ it should also accept responsibility for ’jobs destroyed or prevented,’” saidBill Dunkelberg, chief economist at the National Federation of Independent Business.

Ignoring the flaws in the stimulus for the moment, Congress raised the hurdle for hiring entry-level workers when it refused to delay the third step in a three-stage minimum wage increase last year. And the Department of Labor cracked down on unpaid internships, outlining six criteria that businesses had to satisfy in order to hire someone willing and able to work for nothing to get the experience.

For example, the employer must derive “no immediate advantage from the activities of the trainees, and on occasion the employer’s operations may actually be impeded.”

You can’t make this stuff up.

Recession’s Advantage

At the White House briefing last week, Romer touted the leveraging of public investment with private funds, with $1 of Recovery Act funds partnering with $3 of outside spending. Romer said this public spending “saved or created 800,000 jobs” in the second quarter alone.

Once again, what would have happened in the absence of the government’s targeted intervention?

According to a June 2009 study by the Kauffman Foundation in Kansas City, Missouri, well over half of the companies on the Fortune 500 list, and almost half of the fastest growing companies in America, were started during a recession or bear market. Dunkelberg calls this phenomenon “negative push starts.” People might not be willing to quit their jobs, but if they get laid off during a recession and were thinking about starting a business, they might seize the day, he said.“When people ask me when the best time to start a company is, I tell them the day before the recession ends,” Dunkelberg said. “They can do it on the cheap, and the next day you get cash flow.”

Model That!

What’s more, firms less than five years old are responsible for all of the net new jobs created in the U.S., the Kauffman study found. Job creation by start-ups is more stable, less sensitive to the business cycle.

So, if the goal is to create more jobs, and start-ups are the ones that create them, why is the Obama administration partnering up with existing firms?

“Job-creation policies aimed at luring larger, established employers will inevitably fail,” said Tim Kane, Kauffman Foundation senior fellow in research and policy and author of a follow-up study released this month.

Not to worry. The White House has a model that turns failure into success.